Buying offices with NEDS


Just as 90 North, along with innumerable other companies, start making plans to return to the office, talk of the death of the sector has been rather overplayed.

Large multinationals grab the headlines with their plans for remote working, and perhaps I’d be doing the same if I had their rent bill! But, as far as I see it, teams want to be physically back together. A standard response from those I have spoken to envisages being in the office two or three days a week, let’s call it half the week, but without adopting often unpopular hot-desking, tenants are still going to need nearly as much space as before. And I have an inkling that we may all fall back into the habits of old, with two or three days becoming four or five days of commuting.

For real estate investors, modern office properties with long leases, fixed or inflation-linked rent increases and credit tenants look tempting, but additional criteria should be considered. To what have become established as the defensive sectors of beds (residential), meds (healthcare) and sheds (logistics), we at 90 North have added the due diligence criteria of NEDS when assessing office opportunities.

Need: Do the employees need to be in the office? Is it linked to adjacent manufacturing, have operating systems only available in the office or include research and development (lab) space. Chemical experiments on the kitchen table are best left to the history books of home schooling.

Ease: Is it easy for the employees to get to the office? This is multifaceted depending on the market, but ease of car travel, parking availability and walking distance to a main railway station are all aspects that increase the likelihood that people will choose to travel in.

Desire: How desirable are the local amenities and environment? Travel into a capital city holds attractions beyond the office itself, with shops, restaurants, gyms and more adding depth to the working day. Suburban offices should be considered on the same basis.

Safety: Can the property provide a safe environment for employees? The US is starting to heavily publicize Well Building certification, which measures attributes conducive to employee well-being from air quality and natural lighting to fitness activities and healthy food options.

Each investment opportunity need not score 100% on each criteria, but NEDS seek to establish a framework to consider why an acquisition may outperform the market.

Many Islamic investors, using NEDS or otherwise, have made office investments in the last few months, with Gulf Islamic Investments making a significant US$300 million commitment to Paris with its purchase of Altais Towers, Kamco Invest buying three regional offices in the UK, and SEDCO Capital heading to Washington, DC for its acquisition of 1899 Pennsylvania Avenue.

Last but certainly not least, yields on offices remain compelling. Compared to the hottest market of logistics, I’d estimate that yields are 50% higher for the same age of property and lease length. That is a lot of required rental growth in logistics to get to the same Day 1 position for office stock. Happy hunting!

This article was first published in IFN Volume 18 Issue 18 dated the 5th May 2021.